Central banks and large scale asset purchases 

With COVID-19 causing concerns, the RBNZ announced to cut the official cash rate to 0.25% on 16 March.  Given this the OCR is at a low level now- leading to open consideration of other potential “unconventional tools” such as Large Scale Asset Purchases (LSAP) or more commonly termed as Quantitative Easing.  With this now taking place around the world I wanted to discuss these tools.

Upfront I want to note that monetary policy doesn’t do anything to prevent a pandemic – so the main purpose of most of these tools in the short term is to ensure liquidity and avoid the insolvency of firms and financial institutions that would be solvent in the long-term.

But coming out of the pandemic the ability to “boost demand” will be important in the future- so having an idea about how the tools can fill that aim when the time comes is useful.

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ECON 130 Week 3: Consumer theory continued

Hello all!

Last week you learned about indifference curves and budget constraints, and how we could use these concepts to understand individual choice. In the end we were able to build a demand curve that related the quantity demanded by an individual to the price of the product.

This week you will go through more details about the demand curve, and then go into other examples where the budget constraint is not “monetary income at a point in time” but instead related to intertemporal consumption and the work-leisure choice with your scarce time.

These examples are a bit more complex, so if you don’t understand them at first that is normal – just keep going through them to see if you can.

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Keeping track of the business cycle

Business cycles, the phases of expansion and recession in an economy, are a durable feature of macroeconomic data. Typically, quarterly real GDP data is used to determine the phase of the business cycle we are in.

Unfortunately, official New Zealand data on quarterly GDP does not go back very far in time, limiting our ability to understand recessions and expansions. Here I want to share some work I’ve done trying to build a consistent GDP series for New Zealand that goes back until 1947.

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Pandemics and scarcity – thinking about grocery prices, overall demand, and understanding policy

With the pandemic news moving quickly Matty convinced me to spend more time on Twitter to keep up with the news (my account is here if you want to follow). I saw some interesting links regarding the economics of COVID-19 which I would like to share and comment on – and I decided to run through all these points on one post .

Here are the topics I cover. Each is titled, so you can scroll down if you are only interested in one these:

  • A jump in the CPI even as demand falls? Consumer prices may rise in the short term, even as expenditure is falling – and this “price level” change is not necessarily indicative of a supply shock.
  • How to visualize the “timeline” of COVID-19 and the economic elements.
  • What does ECON101 think?
  • On humility: During the health crisis public health experts are the primary people able to analyse the issue and help with policy. Economists main role remains defining the trade-offs, but not deciding policy.

I don’t want to state what policies I think are good and which are bad. Instead I just want to share these points, as they are ideas I am using to understand what different policies might be trying to achieve as an interested person.

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Understanding Wellington and toilet paper

Toilet paper has been running out all around the world, with Australian’s genuinely fighting over it in supermarkets – and there has been a big show about it in the news.

This leads to some interesting thought experiments such as:

And yet, here I am in a big Wellington supermarket. It has:

  1. lots of toilet paper,
  2. specials on all the toilet paper!

This doesn’t seem to make sense. If concerns about COVID-19 are driving people to panic buy toilet paper we know that the demand curve has shifted right, and prices should have risen! So what is going on. Lets put our economics hats on and find out 🙂

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Do we need to lower interest rates to battle COVID-19?

There is a lot of talk about a 50bp cut by the RBNZ in a couple of weeks due to COVID-19.  But what does this mean, and why are we cutting interest rates to battle a bad flu?  

In this post I am going to discuss the case for interest rate cuts during a natural disaster, to help to explain what demand shock they are battling and why this cut makes sense. The RBNZ already applied this logic during the Canterbury earthquake in 2011, so it is useful to think about COVID-19 from a similar perspective.

I’d like to thank the people I’ve chatted with about this issue to clarify what is going on – you know who you are, and I appreciate it.  The New Zealand economics community is wonderful!

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